Qantas will not add new capacity in its price war with rival Virgin Australia. Photograph: Saeed Khan/AFP/Getty

The price war between Qantas and Virgin Australia appears to be over after the national carrier said it would not add new capacity in the coming months.

The two airlines have been rapidly increasing their number of domestic flights, and the size of planes used on those routes, for the past two years, at a sizeable financial cost.

But Qantas now plans to pull back, and will add no new capacity in the first three months of the 2014-15 financial year. That will mean smaller planes and fewer flights in non-peak travel periods than the airline had been planning.

The airline said recent measures of consumer confidence had shown a steady fall, and that had been reflected in demand for flights.

Macquarie analyst Sam Dobson said the announcement could spell the end of the capacity war – pending Virgin's response.

"With the new Virgin Australia directors from partners Air New Zealand, Singapore Airways and Etihad due onto the Virgin Australia board next month, we doubt whether Virgin Australia will respond aggressively to Qantas's olive branch," Dobson said in a note to clients.

Qantas said it could return to its capacity growth strategy if demand picks up.